Deere & Company: Is the Recent Runup Justified?

While the company's offerings in precision agriculture are impressive, it is an expensive stock

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Ishan Majumdar
Apr 12, 2021
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Illinois-based agriculture and construction machinery company Deere & Co. (

DE, Financial) kicked off 2021 with a particularly strong first-quarter result and double-digit growth, backed by improving conditions in the farm and construction sectors.

The Chinese market, one of the first to rebound economically from the pandemic, has acted as a key driver behind Deere's growth over the past year. The company has a strong order book position not only with respect to agricultural machinery but also for compact utility tractors and turf equipment.

Given the strength of its operating results, strong cash generation and consistently leading the field in adopting smart technology to farming, Deere is poised for a decent 2021 ahead. However, is it worth buying now given the recent runup in the stock price?

Recent financial performance

Deere has surpassed the revenue expectations of Wall Street in almost every single quarter of 2020, and it continued this trend in the first quarter of the 2021 fiscal year, which ended on Jan. 31.

For its first quarter of fiscal 2021, the company reported a top-line of $9.11 billion, which implies a staggering 19.41% growth as compared to the $7.63 billion in revenue reported in the corresponding quarter of the previous year. The company beat the analyst consensus estimate of $7.21 billion.

Deere's revenues translated into a gross margin of 29.44% and an operating margin of 19.61%, which was again higher than that in the prior-year period.

The company reported net income of $1.22 billion and adjusted earnings per share (EPS) of $3.87, again surpassing the average Wall Street expectation of $2.17.

Expansion in precision agriculture

Deere's agriculture equipment sales are witnessing a boost owing to its growing range of precision agriculture with technologies like Autotrac, Section Control, ExactApply, ExactEmerge, TrueSet and Combine Advisor. These are digital technologies providing real-time data and analytics services that offer a significant competitive advantage in aiding farmers to better plan and improve the efficiency of planting and harvesting.

The management remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to do and more precise across the production process. They believe that these tools will allow customers to demonstrate the impact of their sustainable outcomes, enabling them to tap into new markets for revenue and financing.

Strength across all segments

Deere continues to exhibit strong performance across all of its segments on account of positive price realization and higher shipment volumes.

The company's construction and forestry business has benefitted from a reasonably strong housing market, a modest recovery in the oil and gas sector and the industry's proactive inventory management.

Deere's continuous focus on providing its customers with the tools to operate in a more sustainable manner has proven to bode well for the company. For example, the grade control technology delivers significant time and materials savings through automating control of the edge of the bulldozer which subsequently translates into a reduction in costs.

Apart from this, an increased spending on agriculture equipment, primarily small tractors, led to a 27% growth in the small agriculture and turf segment.

Notably, the stay-at-home trends have resulted in more consumer spending being allocated towards home improvement, providing a significant tailwind to small agriculture and turf equipment. The company is likely to experience an increase in demand for its products in the near term, as construction activities gain pace.

In March 2021, Deere introduced See & Spray, an application that can be installed on a John Deere Sprayer to minimize input costs and only spray weeds when they are detected. This is the first application of commercialized machine learning and artificial intelligence (AI) that we are seeing in the agriculture equipment space, which is expected to be a huge growth driver for the company in the years to come.

Final thoughts

As we can see in the chart above, Deere's stock price has almost tripled in the past 12 months and is trading at sky-high valuations. This is being driven by the strong performance, especially in the Chinese markets, as well as the company's continuous focus on technology advances and the string of good results.

The company is trading at a price-earnings ratio of 35 and an enterprise value-to-revenue multiple of 4.26, which are both significantly higher than the median for the Farm and Heavy Construction Equipment industry. While the gradual improvement of the economy is expected to bring further demand for construction equipment, I believe that the stock is richly valued given the type of business and has limited scope for multiples expansion. Overall, I think that while Deere is expected to have a good 2021, it deserves a "Hold" rating.

Disclosure: No positions.

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I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies. I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.